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Monday, December 31, 2012

Raising Taxes ... How Much and on Whom? ... And What About Welfare-Entitlements?

There has been lots of noise and political chatter this year about the need to raise taxes on the 2% top earners, aka the "rich." Rather than argue the case, let's just admit that that's a done deal. Now what about the other 98%?

You see, the tax increase on the rich is nothing but a political ploy. It helped win Presdient Obama's re-election, of course, but now that's a done deal, too. Four more years.

So now let's look at the reality of why taxes on everybody need to go up, regardless of who says what or who's in office.

Here's the deal. Raising taxes by 100% on 100% of the taxpayers would in all likelihood not produce a balanced budget. That's right -- a 100% tax increase on 100% of the taxpayers wouldn't eliminate our deficits.That's why we need solid and sustainable economic growth led by the private sector, but that's not where we're headed anytime soon. Unfortunately.

So why don't our elected self serving aristocrats get serious about this spending and taxing deficiency that's going to prevent our children from enjoying the same opportunities we're had? Good question.

"IN the continuing fiscal negotiations between President Obama and House Republicans, both sides have, from the very beginning, agreed on one point: Taxes on the middle class must not rise. But maybe it’s time to reconsider this premise. An unwavering commitment to keep middle-class taxes low could be one reason the political process has become so deeply dysfunctional.

Let’s start with the problem: the budget deficit. Under current policy, the federal government is spending vastly more than it is collecting in tax revenue. And that will be true for the next several decades, thanks largely to the growth in entitlement spending that will occur automatically as the population ages and health care costs increase. As a result, the ratio of government debt to the nation’s gross domestic product is projected to rise, substantially and without an end in sight.

That can happen for a while, or even a long while, but not forever. At some point, investors at home and abroad will start questioning our ability to service our debts without creating steep inflation. It’s hard to say precisely when this shift in investor sentiment will occur, and even whether it will strike in this president’s term or the next, but when it does, it won’t be pretty. The United States will find itself at the brink of an unprecedented financial crisis. . . .

Democrats . . . want to preserve the social safety net pretty much as is. They balk at any attempt to reduce this spending, including even modest changes like altering the price index used to calculate Social Security benefits. They focus their attention on raising taxes on the most financially successful Americans, contending that the rich are not paying their “fair share.”

Fairness, like beauty, is in the eye of the beholder. Unfortunately, people’s judgment is often based on anecdotes that distort rather than illuminate. The story of the undertaxed Warren Buffett and his overtaxed secretary looms larger in the public’s mind than it should.

Here are some facts, so you can judge for yourself:

In 2009, the most recent year for which data are available, the richest 1 percent of Americans paid 28.9 percent of their income in federal taxes, according to the Congressional Budget Office. (That includes income taxes, both individual and corporate, and payroll taxes.) Members of the middle class, defined as the middle fifth of households, paid 11.1 percent of their income in taxes.

Some of this difference in tax rates is attributable to temporary tax changes passed in response to the recent recession. But not all. In 2006, before the financial crisis, the top 1 percent paid 30 percent of their income in taxes, compared with 13.9 percent for the middle class.

These data suggest that the rich are not, as a general matter, shirking their responsibilities to support the federal government. To me, the current tax system looks plenty progressive. Others may disagree.

One point, however, cannot be disputed: Even if President Obama wins all the tax increases on the rich that he is asking for, the long-term fiscal picture will still look grim. Perhaps we can stabilize the situation for a few years just by taxing the rich, but as greater numbers of baby boomers retire and start collecting Social Security and Medicare, more will need to be done.

Which brings us back to the middle class. When President Obama talks about taxing the rich, he means the top 2 percent of Americans. John A. Boehner, the House speaker, talks about an even thinner slice. But the current and future fiscal imbalances are too large to exempt 98 percent or more of the public from being part of the solution.

Ultimately, unless we scale back entitlement programs far more than anyone in Washington is now seriously considering, we will have no choice but to increase taxes on a vast majority of Americans.

This could involve higher tax rates or an elimination of popular deductions. Or it could mean an entirely new tax, such as a value-added tax or a carbon tax.

To be sure, the path ahead is not easy. No politician who wants to be re-elected is eager to entertain the possibility of higher taxes on the middle class. But fiscal negotiations might become a bit easier if everyone started by agreeing that the policies we choose must be constrained by the laws of arithmetic."

Summing Up

Are higher taxes across the board and reduced welfare-entitlements up ahead for We the People? Yes, both are going to happen sometime soon.

And they will hit all of us. The problem is simply too big to be solved by a small percentage of the population.

It's just math.

In rough numbers, We the People pay over $1 trillion in personal income taxes. We spend over $3.5 trillion annually. In total we collect about $2.5 trillion from all sources. That leaves a $1 trillion annual shortfall or deficit between spending and tax receipts. And while more private sector led economic growth will certainly help, even that won't solve our excessive government spending related problems.And although doubling individual income tax collections (100% increase on 100% of taxpayers) would theoretically eliminate our deficits, it won't. Even that wouldn't be enough, since the impact of such an extreme raise in taxes would undoubtedly impact economic growth negatively in a big way and thereby reduce income tax receipts, since income would decline due to the lower economic activity. Thus, reduced welfare-entitlements are up ahead for We the People, regardless of what's done with taxes, and that's in addition to the higher taxes on all taxpayers.Unless a drastic reduction in government spending takes place, which it won't.

So even while the aristocratic Remocrats and Depublicans all proclaim in apparent sincerity that higher taxes and reduced welfare-entitlements aren't going to be imposed on the 98% of "middle class" taxpayers at some near point down the road, don't believe a word they're saying.They're lying. And we're letting them. What does that say about us?